Covid-induced spike in palm oil prices to aid Godrej Agrovet's profits

The segment was a key driver of revenues and margins in the September quarter

Rise in palm oil prices is expected to rub off positively on the earnings of Godrej Agrovet. The segment accounted for 17 per cent of the company’s consolidated revenues in the September quarter and is among its more profitable businesses. Other key segments include animal feed, crop protection, dairy and the poultry business under Godrej Tyson joint venture. 

The immediate trigger for the stock is the upside in the palm oil segment given the linkage to global prices. Unfavourable weather conditions, worker issues and supply constraints on account of the coronavirus pandemic in Indonesia and Malaysia, the two biggest producers of palm oil, has resulted in a global supply deficit of vegetable oils, according to reports. Subsequently, palm oil prices have jumped close to 60 per cent over the previous year. 

This in turn is benefitting the company’s palm oil business. Godrej Agrovet is amongst the largest oil palm developers in India with more than 61,700 hectares of plantations across six states, according to the company’s website. It extracts the crude palm oil and sells it to mostly business to business customers in India. Margins in the segment have risen by 200 basis points over the year ago quarter to over 14 per cent in the September quarter. 

“While we don’t factor-in the profitability changes due to higher palm prices, we believe if crude palm oil prices rise 5 per cent y-o-y, there is a likely upside of 2 per cent to Godrej Agrovet’s earnings,” said brokerage firm ICICI Securities in a recent report. 

The palm oil business was a key growth driver for the company last quarter. Revenues from the business grew 24% on a year-on-year basis to Rs 293 crores. And analysts are confident of the growth momentum going ahead. “Volume growth in the palm oil segment is likely to return on stronger fresh fruit bunches (FFB) arrival; a new plant with improved technology should also ensure higher yield. Higher palm oil prices would aid margin expansion,” said brokerage firm Motilal Oswal. 

Shares of Godrej Agrovet are up 36 per cent in the last 6 months as compared 31% for the benchmark Nifty 50 index during the same period. Most analysts have a buy rating on the stock. The 12 month consensus target price of analysts tracked by Bloomberg indicates a potential upside of 9 per cent from Wednesday’s close.